The People’s Bank of China, like many others around the world, is quickly discovering that monetary policy easing is not delivering the same results today as was previously the case in the past.
Slower economic growth, in part due to a government’s resolve to accelerate the nation’s economic transition towards growth powered by services and consumption, has seen the PBOC policy toolkit become more varied, and unconventional, in recent years.
Alongside the six rate cuts and multiple reductions to the reserve requirement ratio for banks since late 2014, the bank has tinkered with the rate-setting mechanism of the renminbi, allowed local governments to issue 3.84 trillion yuan in new bonds, and relaxed housing market restrictions, particularly in smaller cities.
A slightly weaker, more market-orientated currency, lower borrowing costs for heavily indebted local governments, reduced interest rates for households and corporates along with measures to boost the housing market. One, let alone all of those factors combined, would normally have done the trick to bolster economic growth.
Alas, despite all of that stimulus, economic conditions – at least compared to previous norms – remain tepid at best.
According to Zhi Ming, Zhang Helen Huang and Desmond Kuang, members of HSBC’s fixed income research team, the traditional easing implemented by the PBOC has been “ineffective”, stating that they “should not be counted on to stabilise the economy” in the year ahead.
Should economic growth continue to underwhelm, the trio suggest that Beijing will continue to roll out unconventional, and in some cases untested measures, in a bid to stimulate economic growth.
“We believe unconventional – and in some cases untested – measures may be tried this year.” say Ming, Huang and Kuang. “As new problems unfold, new tools have to be brought into use, including some that have not tested before and are introduced on a ‘trial and error’ basis. This explains why recently Beijing appears to be less transparent and less predictable in its policy initiatives.”
They also suggest that they “expect policy to be even more experimental this year than it was in 2015”, an ominous statement given the market volatility generated in the second half of last year.
If HSBC proves to be correct, the risk of a policy misstep will also grow substantially. For a US$10.3 trillion dollar economy, the ramifications from such an outcome would be horrendous.